Negative rates in focus as Bank of England updates the market

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·3-min read
The Bank of England in the City of London financial district. Photo: Matt Dunham/AP
The Bank of England in the City of London financial district. Photo: Matt Dunham/AP

Economists expect the Bank of England’s Monetary Policy Committee to leave policy unchanged in its latest announcement on Thursday, with focus instead shifting to an expected update on the central bank’s negative rates project.

The Monetary Policy Committee meets this week for the first time in 2021. Analysts and economists predict the nine-member committee will leave the UK interest rate unchanged at 0.1% and leave its unconventional monetary policy tools untouched.

“Following surging UK Covid cases and a new lockdown, more stimulus would be a reasonable response we think,” Bank of America economists said in a preview note. “But BoE speakers have suggested no inclination for extra stimulus now, preferring to debate negative interest rates.”

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The market will instead be focused on an expected update from the bank on its negative rates work, which has the potential to move the sterling exchange rate and banking stocks.

“The Bank of England’s February meeting looks set to be a particularly interesting event,” said George Buckley, chief UK and European economist at Nomura. “Not because of any anticipated adjustment to monetary policy, but rather because of what the Bank says about the potential for including negative interest rates in its toolkit.”

The Bank of England first floated the possibility of taking rates into negative territory last year and has been working with UK banks to ensure they are ready. Deputy governor Sam Woods told MPs earlier this month that the Bank of England would publish an update on the project in its February Monetary Policy Report.

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“We expect the Bank to go further and announce that, based on this review, negative rates can now be used if required, but at the same time admitting that deploying this tool is not without its risks,” Buckley said.

Focus will also fall on new economic forecasts in the quarterly Monetary Policy Report, which will be published alongside the MPC’s decisions. Economists expect the Bank of England to upgrade its expectations for 2020 but downgrade forecasts for the year ahead. COVID-19 mutations have forced to UK back into lockdown, curtailing short-term growth prospects.

“The Bank's November MPR projection for 2021 was always a tad optimistic at 7.25%, likely making a downgrade inevitable,” said Sanjay Raja, Deutsche Bank’s chief UK economist.

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While growth prospects have weakened, the ongoing vaccine rollout will give policymakers hope that the economy can rebound strongly in the back half of the year.

Raja said the MPC was likely to strike a “dovish” tone in its update and said policy action beyond February was “a close call” that depended on the vaccine rollout and the strength of any economic bounce back that follows.

The MPC decisions and the Monetary Policy Report will be published at 12pm on Thursday 4 February.

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